Bid temptation for Rainbow

Press, 3 February 1987, Page 19

Bid temptation for Rainbow

PA Wellington The temptation to make a full bid for Progressive Enterprises, Ltd, may be too great for Rainbow Corp, Ltd, to resist, a research paper by brokers Jordan Sandman Smythe says. The purchase of 44 per cent of Progressive by Rainbow will accelerate Progressive’s mediumterm profit and the benefits accruing to Rainbow on consolidation of the results appear compelling, the paper said. The holding in Progressive now forms in excess of 20 per cent of Rainbow’s total assets, but Rainbow is unlikely to receive a positive profit contribution after funding costs before 1989. At least 40 per cent of Rainbow’s assets are unable to provide a positive profit contribution when Rainbow’s holding in Woolworths Australia is taken into account. Market plays involving Rothmans and Omnicorp made Rainbow a combined profit of $36 million, but Rainbow has still to put together a major source of sustainable earnings. The benefits of a merger between Rainbow and Progressive may be too great to be ignored and Rainbow is likely to try and achieve this, the paper argues. Under existing agreements Rainbow cannot lift

its holding in Progressive above 44 per cent without Progressive board approval.

Progressive therefore appears to have the advantage.

The placement of shares to Rainbow raised $83.6 million lifting shareholders’ funds by 77 per cent and Progressive’s cash reserves are well in excess of any short-term capital expenditure requirements. Progressives underlying quality of earnings, growth prospects, and excellent. cash flow have been rejuvenated as a result and should command a high price in the event of a merger.